BITS; Judge Rejects Settlement of Facebook Suit

By SOMINI SENGUPTA

Published: August 19, 2012

Late Friday, a federal judge in California rejected the pending settlement of a class-action lawsuit against Facebook, calling on both sides to prove that the terms of the settlement were not "merely plucked from thin air."">

A judge rejected Facebook's settlement offer in response to a lawsuit that said the company violated California law by publicizing users' "likes" of certain advertisers without paying them or giving them a way to opt out. Facebook's advertising efforts face a new legal hurdle at a time when the social networking giant needs to increase revenue and convince investors of its long-term prospects.

Late Friday, a federal judge in California rejected the pending settlement of a class-action lawsuit against Facebook, calling on both sides to prove that the terms of the settlement were not "merely plucked from thin air."

The case focuses on an advertising tactic known as sponsored stories, in which Facebook users endorse brands, in some cases without their knowledge. For example, if users "like" Wal-Mart, the retailer uses their names and pictures in advertisements to their friends on the social network. Wal-Mart pays Facebook for the service.

Facebook has extolled such advertising. Executives view it as an especially valuable source of revenue on mobile phones, an area where the company has been struggling to bolster its profits.

In the class-action lawsuit filed last year, the plaintiffs argued that Facebook users were not sufficiently informed of how their "likes" translated into profits for the company. The two sides reached a tentative settlement earlier this year.

As part of the proposed deal, Facebook agreed to better inform users about sponsored stories, to limit their use and to allow people under 18 to opt out of the function. The company also agreed to pay $10 million to a dozen research and advocacy groups that work on digital privacy rights, and $10 million to cover legal fees for the plaintiffs. But the settlement did not inhibit Facebook from continuing to serve up sponsored stories.

On Friday, Judge Richard G. Seeborg of United States District Court in San Francisco rejected the draft order and asked both sides to justify how they had negotiated the dollar amounts. "There are sufficient questions regarding the proposed settlement," he wrote.

The judge's questions are likely to draw Facebook's lawyers to court for the next several months.

Judge Seeborg said he wanted clarification on whether there could be relief for the millions of Facebook users whose names and photographs had already been used. He also asked about the "adequacy and fairness" of how the two sides agreed on the amount to be given to charity. And he raised concerns about the size of the legal fee payment, worrying that the plaintiffs' lawyers "may have bargained away something of value."

"We continue to believe the settlement is fair, reasonable, and adequate," a Facebook spokesman said in an e-mail late Saturday. "We appreciate the court's guidance and look forward to addressing the questions raised in the order. We are confident we can address the issues raised by the court without substantially revising the settlement."

This is a more complete version of the story than the one that appeared in print.

Late Friday, a federal judge in California rejected the pending settlement of a class-action lawsuit against Facebook, calling on both sides to prove that the terms of the settlement were not "merely plucked from thin air."">